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Deutsche Bank, UBS ‘Hung Deal’ Faces Fraud at ConvergeOne

(Bloomberg) -- A two-month struggle by Deutsche Bank AG and UBS Group AG to offload $1.2 billion of buyout loans has hit a new roadblock: suspected employee fraud at the company that went private, according to people with knowledge of the matter.

ConvergeOne, acquired by CVC Capital Partners earlier this month after the banks funded the deal, is facing an $11 million inventory writedown after discovering an employee may have committed fraud, the people said, asking not to be identified because the information hasn’t been made public.

The ConvergeOne financing was already the biggest of a pile of so-called “hung deals” that banks were having trouble selling to investors in recent weeks after market volatility in December. But much of that backlog has been clearing as lenders offered discounts and improved terms. Investors are likely now angling for even steeper discounts on the ConvergeOne debt, the people said, which could trigger losses for the banks.

The banks are arguing that a rogue employee was to blame for the inventory writedown and the situation shouldn’t reflect broadly on the company, two of the people said. CVC has hired an independent auditor to examine ConvergeOne’s finances and put to rest concern that internal controls are inadequate. The writedown figure represents about 10 percent of gross profits for the third quarter.

The banks had been awaiting year-end financials on the company before trying again to sell the debt, according to the people. Within days of the acquisition being completed earlier this month, the company told the banks about the writedown, and that information has been communicated to some potential investors, the people said.